How to Prepare for Mortgage Rate Increases
There’s a lot of talk about mortgage rate increases in Canada. After years of ultra-low interest rates there’s only one direction for rates to go – up.
The Bank of Canada Governor, Mark Carney, is painting an increasingly bleak future for the Canadian housing market. Although soft in his chosen words his message is clear, “when rates go up, we are in trouble”. The single biggest investment most Canadians make is their home which represents almost 40% of the average family’s total assets. The big problem is many Canadians are living in homes they won’t be able to afford once interest rates start to rise.
Top economists and mortgage experts expect rates to increase by 0.5% by the end of 2011 and another 1.5% by the end of 2012. Here’s a few tips to help you prepare for the rate rise.
Tip #1: Pay Down Your Principal
If rates are going up, the best plan is to lower your principle so you’ll pay interest on a smaller amount of debt in the future.
Switching from Monthly to Rapid Bi-Weekly
You can save thousands of dollars by making a few small changes that will help to pay down your principal faster, such as switching from monthly mortgage payments to bi-weekly rapid payments.
For example, on a $250,000 mortgage at 3.99% interest amortized over 25 years, you could save over $20,000 by switching to bi-weekly rapid payments!
Lump Sum Prepayments
Also consider making lump sum prepayments or double up one month. Many closed mortgages allow you to pay up to 15-20 per cent of your mortgage or to double up a monthly payment annually. Prepayments are applied directly to the principal balance, which will save you money.
Tip #2: Plan for it Now
Pure and simple - if you’re worried about money problems in the future, deal with it now. Create a savings account that will be used to cover increases in mortgage payments in the future. If you’re currently on a variable mortgage rate, you’re probably paying very low interest. Imagine your interest rate was 2% higher, calculate what your payments would be and then put the extra aside in a savings account.
Tip #3: Get Some Professional Advice
If you’re worried about not being able to afford your home when rates increase, speak with a mortgage professional about your options. You might be able to refinance now and lock in at a lower rate. Or, it might make sense for you to consolidate your debt to pay off high interest loans with a home equity loan.
Tip #4: Get Real About Your Debt
If you’re already living above your means, it will only get worse. Be honest about your current debt level. If you have to, downsize your home or consolidate your loans to protect yourself from rising interest rates. Don’t let your debt become unaffordable before it’s too late. Most importantly, if you are shopping for a new home, calculate your affordability at a much higher interest rate, it’s the only way you can determine your chances of affording your home for the long term.